How to Franchise
By: Kevin B. Murphy, Franchise Attorney, MBA - Mr. Franchise

RECOMMENDATIONS   

My twenty-eight years of experience has demonstrated that in order for a franchise company to get off to a good start, a heavy emphasis should be placed on strategic franchise planning to manage future franchise relationships as discussed above. Then, before the franchise program begins, management needs training in how to effectively operate a franchise organization.

At a minimum, the following programs should be in place before franchise marketing efforts begin:   

1. Franchise Lead Processing System (sm): Two key considerations for all franchise companies engaged in franchise marketing are the careful screening of franchise applicants and adopting the proper media plan, schedule and budget. Only the cream of the crop should be allowed to join the franchise network. Eliminating applicants at the entry stage is far easier than waiting for inevitable and costly problems later on. An examination of franchise networks plagued by troublesome franchise owners (who often ripen into future lawsuits) shows a lack of planning and attention to this relatively simple concept. Given the unlimited personal liability risk inherent in franchising, companies neglecting this important concept, or those using franchise brokers, are simply asking for trouble.  

Before franchise marketing efforts start, a company should adopt a customized Franchise Lead Processing System that includes instructing key personnel in: 

• Adopting the proper organizational structure.
  
  
• Defining the appropriate profile characteristics of prospective franchise owners.
  
  
• Developing effective interviewing techniques, marketing materials, procedures and checklists.
  
  
• Using a series of tests and other measures to ensure that inappropriate candidates are disqualified before joining the franchise network.
  
  
• Detecting (and then avoiding) red flags that arise in the franchise marketing cycle.
  
  
• Adopting the appropriate media plan, schedule and budget.   

2. Legal Compliance Program (sm):   A franchise lawsuit can result if inconsistent or misleading communications occur when a franchise is first sold. Most of the legal risk is franchising centers around what happens during the marketing cycle: the twenty-three chapters of disclosures in the franchise disclosure document as well as who said what, and when. Defending any franchise lawsuit, even a frivolous one, can be enormous.

Franchise companies involved in franchise litigation are shocked to discover they have fallen into a quicksand that swallows up time and money without limit. The cost of prosecuting or defending even a "small" franchise lawsuit can quickly exceed $100,000, and up. Exposure can run into the millions.

Although one study of franchise disclosure documents indicated 27 percent of franchise companies have a history of franchise litigation (slightly greater than 1 in 4), the real percentage is much greater and probably north of 50 percent. This is because only pending litigation and final judgments must be disclosed in franchise disclosure documents.

Most franchise litigation cases, like other litigation cases are settled, so they’re only required to be in the franchise disclosure document from the time they’re filed until settled. After that, they vanish without a trace. And whether the chances of getting sued in a franchise lawsuit and getting embroiled in franchise litigation is greater than 1 in 2 or 1 in 4, who wants to get involved in a time-consuming, stressful and expensive mess?  

It is almost impossible to avoid potential franchise liability unless a genuine program of education and instruction is conducted with marketing personnel as well as middle and executive franchise management. An integrated Disclosure Compliance Program that specifies rules and expectations (including legal rules in selling a franchise), manages franchise disclosure documents and controls the dissemination of all information is absolutely essential. It is also one of the best investments a franchise company will ever make.

For all of the above reasons, the use of franchise brokers is definitely NOT recommended. Their statements (or other actions) made to "close the deal" will make the franchise organization (and the personal assets of its officers) liable for violations of federal or state franchise laws. This also explains why the overwhelming majority of successful franchise organizations set up their own in-house franchise marketing department so that actions and statements made during the franchise marketing cycle can be monitored and controlled within the framework of a Franchise Sales Control System (sm).   

Next - Franchise Control Systems and Managing Franchise Relations

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